Review of Accounting and Finance

Auditor-provided tax services and long-term tax avoidance

Brian Hogan Tracy Noga
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Auditor-provided tax services Auditor-

provided tax
and long-term tax avoidance services
Brian Hogan
Department of Accountancy, University of Pittsburgh, Pittsburgh,
Pennsylvania, USA, and
285
Tracy Noga Received 15 October 2013
Revised 29 January 2015
Department of Accountancy, Bentley University, Waltham, Accepted 29 January 2015
Massachusetts, USA

Abstract
Purpose – The purpose of this paper is to determine the association between auditor-provided tax
services (APTS) and long-term corporate tax rates.
Review of Accounting Finance 2015.14:285-305.

Design/methodology/approach – The paper uses empirical data and multivariate regression

models to explore the relationship between a firm’s use of APTS and their long-term effective tax rate.
Findings – An economically and statistically significant long-term negative relationship was found
between firm levels of APTS and taxes paid. Further, a portion of this benefit is lost for some firms when
returning to their auditor for tax services even after a short break.
Originality/value – This paper contributes to the debate regarding the value of APTS by providing
evidence of the apparent long-term negative consequences to firms who reduce their reliance on APTS,
perhaps even through the engagement of separate accounting firms for their audit and tax functions,
although these consequences may be mitigated upon return with a significant increase in APTS.
However, this is the first study, to our knowledge, to explore, in a long-term setting, the consequences of
a firm’s return to their auditors for a non-audit service previously reduced or terminated. Additionally,
further incremental contributions are made to other studies that look at APTS and tax avoidance by
studying the long-term relationship which allows firms to consider the cumulative cost/benefit
relationship between independence and knowledge spillover.
Keywords Tax avoidance, Independence, Auditor-provided tax services, Long-term taxes paid
Paper type Research paper

1. Introduction
We study the long-term relationship between auditor-provided tax services (APTSs)
and cash-effective tax rates (CETR) over the long term (five years). After the passage of
The Sarbanes–Oxley Act of 2002 (SOX), auditor-provided services declined in part due
to new rules eliminating certain services, as well as requirements involving audit
committee pre-approval for permissible services, such as tax engagements (SOX,
Section 201). These changes came about due to concerns about the impact of high levels
of non-audit fees on auditor independence (Abbott et al., 2003; Davis and Hollie, 2008;
Grant et al., 2008). However, proponents of not limiting non-audit services suggest that

This study has benefited from helpful comments from Charlie Bame-Aldred, Jean Bedard, Diana Review of Accounting and Finance
Vol. 14 No. 3, 2015
Falsetta, Ronen Gal-Or, Udi Hoitash, Ganesh Krishnamoorthy, Colin Reid, Tim Rupert and pp. 285-305
anonymous reviewers and participants at the 2010 AAA Annual Meeting. All errors or omissions © Emerald Group Publishing Limited
1475-7702
are the authors’ own. DOI 10.1108/RAF-10-2013-0116
 RAF synergies are created by combining the audit and tax service functions within one
14,3 accounting firm. In other words, a “knowledge spillover” effect may exist by which
knowledge gained by performing one service “spills over” to other firm engagements
which produce production efficiencies (Gleason and Mills, 2011; Kinney et al., 2004;
McGuire et al., 2012). These proponents feel that the benefits of the combined services
outweigh the potential risks of combined services. As a result, there is a seeming
286 trade-off between auditor independence and knowledge spillover which must be
evaluated by each company making the decision.
The extant literature remains mixed as to which position is more beneficial for firms,
shareholders and policymakers[1]. A number of studies document the impairment of
auditor independence (Choi et al., 2010; Frankel et al., 2002) and others refute
independence concerns (Knechel and Sharma, 2012; Chung and Kallapur, 2003;
Ashbaugh et al., 2003; DeFond et al., 2002)[2]. As APTSs were declined post-SOX, tax
revenues for accounting firms increased (Bédard and Paquette, 2011). Therefore, it
appears that companies are indeed shifting tax engagements. However, if tax planning
is a long-term investment (Rego and Wilson, 2012), looking at only the short-term
Review of Accounting Finance 2015.14:285-305.

relationship may not fully capture the effects of investing in APTS.

This study contributes to this research area by examining the long-term[3] benefits
that arise when firms utilize APTSs. We review a sample of APTS fees in the years
following the passage of SOX and find a statistically negative association between
long-term cash taxes paid and fees paid to auditors for tax services. Firms that do
contract their auditors for tax services, perhaps due to the benefits of knowledge
spillover, appear to reap the benefits of these services in the form of reduced cash taxes
paid. We also study the tax impact on firms who return to APTS after reducing or
eliminating them. Although we find that some benefits are immediately recaptured,
others are not. Additional analysis shows that even one year in which APTS were not
present not only removes the tax benefit but rather creates a negative impact on taxes
paid. This result remains even when a portion of APTS is resumed.
This research adds to the extant literature in several important ways. We contribute
to the debate regarding the value of APTS by providing evidence of the apparent
long-term negative consequences to firms who reduce their reliance on APTS, perhaps
even through the engagement of separate accounting firms for their audit and tax
functions, although these consequences may be mitigated upon return with a significant
increase in APTS. Additionally, we make further incremental contributions to other
studies that look at APTS and tax avoidance by studying the long-term relationship
which allows firms to consider the cumulative cost/benefit relationship between
independence and knowledge spillover.

2. Literature review and hypothesis development

2.1 Audit and tax fees
In 2002, the passage of SOX imposed strict limitations on the types of non-audit services
that audit firms could provide to their audit clients. Although tax services were not
strictly prohibited, the fees paid annually for non-audit services, and separately for tax
services, are again required to be disclosed annually by companies. Due to the new
limitations on the provision of non-audit services, along with increases in audit fees for
SOX compliance, fees paid by audit clients for audit services have grown substantially,
while fees for non-audit services have declined (Markelevich et al., 2005; Omer et al.,
 2006). Maydew and Shackelford (2007) find that payments to auditors for tax and audit Auditor-
services declined from a 1:1 ratio in 2001 to approximately 1:4 in 2004. More recently, in provided tax
2007, non-audit fees represented approximately 21 per cent of total fees paid by
companies to their auditors (Audit Analytics, 2008). In 2005, certain APTS were banned
services
by the Public Company Accounting Oversight Board (PCAOB), and today, there are
additional APTS that require approval of the audit committee.
Prior research has examined non-audit fee changes and fee disclosures in the period 287
following the passage of SOX in 2002 and the subsequent PCAOB regulations. Krishnan
and Yu (2011) find that increases in NAS fees are associated with reduced audit fees.
Omer et al. (2006) find, perhaps in anticipation of the new disclosure requirements, that
the association between tax fees and higher than expected audit fees weakened in 2002.
The authors posit that firms paying high audit fees terminated the provision of tax
services by their auditors. Bedard et al. (2010), studying the decisions of firms to
voluntarily disclose APTS, detect a negative relationship between companies disclosing
these tax fees before they were mandated in 2003 (pre-disclosers) and the ratio of
non-audit fees to total fees.
Review of Accounting Finance 2015.14:285-305.

Bédard and Paquette (2011) observe that mean tax fees for audit sample firms
decreased by 57 per cent from 2004 to 2007, while mean tax revenues for the Big Four
accounting firms increased by 29 per cent over the same period. Maydew and
Shackelford (2007) find similar results and show that, while APTS declined
significantly, post-SOX, total tax fees collected by accounting firms remained steady.
The authors attribute this finding to a shift in clients among the providers of tax services
away from the audit provider. If tax fees have indeed shifted among service providers,
then changes in taxes paid by companies may be related to external tax consulting
arrangements, or the internal tax department, as opposed to the auditing firm. These
findings suggest perhaps that additional monitoring of firms’ aggressiveness in tax
planning is necessary.

2.2 Auditor independence and knowledge spillover

The research on auditor independence and knowledge spillover has spanned many
years but has increased substantially post-SOX. Presumably, firms would choose to
engage their auditors for non-audit services if the expected tax benefits outweighed the
expected benefits of independence. The proponents of limiting non-audit fees paid
contend that auditor independence, or perceptions of auditor independence, may be
impaired if large amounts of non-audit fees are collected by the auditing firm (Davis and
Hollie, 2008; Grant et al., 2008). Favere-Marchesi (2006), in a case study administered to
audit partners and senior managers, find that auditors who also performed tax services
reported a significantly lower assessment of fraud risk than auditors that provided no
tax services to the audit client. Elder et al. (2008) examine the association between tax
services and the reporting of internal control weaknesses. They find that firms with
APTS are less likely to report control weaknesses and conclude that their findings are
consistent with APTS impairing auditor independence rather than knowledge
spillovers arising from the tax services.
Other studies argue that providing dual audit and tax service creates a “knowledge
spillover” effect which improves areas of the reporting process and firm performance
and does not impair auditor independence (DeFond et al., 2002; Choi et al., 2010). Kinney
et al. (2004), in a study of pre-SOX firms, find that firms engaging their auditor for tax
 RAF services are associated with a lower incidence of earnings restatements. Accounting
14,3 risk, as measured by either misleading or fraudulent financial reporting, has also been
found to be lower for companies which outsource their internal audit work to their
external auditor as compared to those which keep the audit work entirely in-house or
outsource the work to another accounting firm (Prawitt et al., 2012). Krishnan et al.
(2013) find that APTS are associated with less earnings management, indicating
288 improved financial reporting and audit quality. However, some findings are mixed.
Cook et al. (2008) find inconsistent results in reporting quality in a post-SOX sample.
If the theory of knowledge spillover is valid, synergies between the audit and tax
functions may help in uncovering tax savings opportunities. Unnecessary taxes paid by
firms represent an allocation of resources away from firm stakeholders; any incremental
benefit received from retaining the auditor for tax services should be examined[4].
Recent post-SOX studies (Cook and Omer, 2013; Dhaliwal et al., 2013; McGuire et al.,
2012) find evidence of knowledge spillover in the short term as they demonstrate that a
reduction in APTS is associated with less tax avoidance.
Some studies have explored the link between APTS and tax measures, although most
Review of Accounting Finance 2015.14:285-305.

of these studies examined data prior to SOX. Mills et al. (1998) find a negative relation
between tax fees paid and tax liabilities. Gleason and Mills (2011) also note that using
APTS is associated with lower US tax expenses. However, the authors, in their sample
of companies from 2000-2002, do not find a positive relation between APTS and lower
US taxes paid. Omer et al. (2006), studying the relation between APTS and subsequent
changes in tax rates, found a negative association, although this relation weakened in
their final sample year (2002)[5].

2.3 Long-term tax effects

Dyreng et al. (2008), examining a sample of firms from 1995-2004, discuss the
capabilities of some corporations to consistently pay low cash taxes. The authors argue
that analyzing longer time horizons helps strengthen findings by accounting for
significant year-to-year variations that exist within short-term tax measures (Dyreng
et al., 2008). Managers, often rated based upon short-term performance measures, are
constantly faced with resource allocation decisions. However, the benefits received from
tax planning expenditures are uncertain and also may not be realized in the short-term
(Rego and Wilson, 2012). A longer-term analysis may provide support for why
managers make long-term tax investments, even in the face of short-term resource
constraints. Hanlon and Heitzman (2010), in their review of tax research, discuss
long-run effective tax rates and cite many benefits of using such a measure. Cook and
Omer (2013) and Dhaliwal et al. (2013) find an association between APTS and their
short-term measure indicating there is indeed a short-term benefit. However, for a
manager to make an informed cost-benefit analysis of choosing APTS, the full
(long-term) impact should be considered.

2.4 Hypotheses
Cripe and McAllister (2009) observe, in a survey of CFOs, that auditor independence
concerns was the primary reason for decisions to separate audit and tax functions. Fees
for non-audit services also declined because a number of non-audit services can no
longer be provided by the firm’s external auditor under SOX. Although tax services
were not included in this list of excluded services, anecdotally, auditors and firms
 separated from these services in the interest of independence. Engaging separate Auditor-
accounting firms to provide audit and tax work, however, may affect the quality of provided tax
services obtained (e.g. lack of knowledge spillover).
Prior studies have argued that synergies are created by combining the audit and tax
services
function within one accounting firm (Cook and Omer, 2013; Dhaliwal et al., 2013;
Seetharaman et al., 2011) and result in improved services. The alternative argument to
knowledge spillover is that the lack of independence will result in a reduced tax rate 289
from the auditor’s signing off on questionable aggressive tax planning. However, under
both scenarios, APTS and tax rate will have a negative relationship. Building on these
prior studies, H1 investigates the effects of reductions in APTS, perhaps through
shifting of tax fees to non-audit firms. If firms are losing the benefits of APTS, then cash
taxes paid will be increasing as APTS decrease. However, as tax planning may be a
long-term investment (Rego and Wilson, 2012), the entire benefit must be measured over
time. H1, stated in alternate form:
H1. Fees paid for APTS are negatively associated with long-run cash taxes paid.
Seemingly, when a firm is not using APTS providers, the work is still being completed,
Review of Accounting Finance 2015.14:285-305.

either by another firm or internally. Separating the audit and tax functions may limit the
implementation of tax service recommendations, as auditors may be less likely to sign
off on projects introduced by competing firms (Gleason and Mills, 2011). If CETR
benefits are obtained from APTS, then firms that move back to APTS after a hiatus
should once again experience the benefits of this synergy. Therefore, we examine
whether re-engaging an auditing firm for tax services, after decreasing fees post-SOX,
results in lower taxes paid. Our H2, stated in the alternate form:
H2. Fees paid to re-engage an auditor for tax services are associated with lower
long-run cash taxes paid.

3. Method
3.1 Data
The sample was collected from Audit Analytics (2003-2009)[6] and Compustat
Fundamentals annual financial statement data (fiscal years 2003-2009). As shown in
Table I, reductions in firm-year observations occurred due to missing tax or control data
from Compustat, the elimination of observations identified as REITS, the need to have
five consecutive observations from Audit Analytics to capture the long-term impact of
APTS and taxes paid and the elimination of firms which changed auditors, as we are
studying the long-term benefits of auditor retention for audit and tax services. Finally,
similar to Dyreng et al. (2008), we eliminated firms that had pretax income of less than
zero to enhance the interpretation of the cash taxes paid measure. This leaves 11,409
individual firm-year observations. Of these firms, there are 1,330 firms that have
complete long-term observations from 2003 to 2007, 1,477 with observations from 2004
to 2008 and 1,366 with observations from 2005 to 2009[7].

3.2 Models and variables

Our main analysis utilizes a fixed effects regression controlling for industry (two-digit
SIC code) and year. We also cluster by firm to generate robust standard errors. All
variables were examined for multicollinearity[8] to ensure that our regression results
 RAF Total observations from audit analytics from 2003 to 2009 126,007
14,3 Less: Observations missing cash taxes paid, pretax income or income taxes (82,115)
Less: Observations identified as REITs (SIC code 6798) (1,303)
Less: Observations without at least five consecutive years of observations (17,463)
Less: Observations missing control data from Compustat (5,933)
Less: Observations reporting an auditor change during the sample period (4,867)
290 Total Firm Observations 14,326
Less: Observations with pretax income ⬍ 0 (2,917)
Total single year firm observations 11,409
Five-year sample breakdown (number of unique firms with full five-year data)
2003-2007 1,330
2004-2008 1,477
Table I. 2005-2009 1,366
Sample selection Total five year observations 4,173

were not influenced by correlations between our explanatory variables. The models to
Review of Accounting Finance 2015.14:285-305.

test H1 (model one) and H2 (model two), respectively, are:

CETRi,t ⫽ ␤0 ⫹ ␤1AVG_TAXFEESi,t ⫹ ␤2RESTATEMENTi,t ⫹ ␤3CAPITALi,t

⫹ ␤4LOGSALESi,t ⫹ ␤5LOGMVEi,t ⫹ ␤6N_SEGi,t
⫹ ␤7BIG4i,t ⫹ ␤8NOLi,t ⫹ ␤9LEVERAGEi,t ⫹ ␤10ACQUISi,t (1)
⫹ ␤11PRETAXROAi,t ⫹ ␤12FOREIGNi,t ⫹ ␤13PERCENTHELDi,t
⫹ ␤14BOARDINDi,t ⫹ ␤15⫺82INDUSTRYi,t ⫹ ␤83⫺84YEARi,t ⫹ ␧i,t

CETRi,t ⫽ ␤0 ⫹ ␤1SMALLSPIKEi,t ⫹ ␤2MEDIUMSPIKEi,t ⫹ ␤3LARGESPIKEi,t

⫹ ␤4RESTATEMENTi,t ⫹ ␤5CAPITALi,t ⫹ ␤6LOGSALESi,t
⫹ ␤7LOGMVEi,t ⫹ ␤8N_SEGi,t ⫹ ␤9BIG4i,t ⫹ ␤10NOLi,t
(2)
⫹ ␤11LEVERAGEi,t ⫹ ␤12ACQUISi,t ⫹ ␤13PRETAXROAi,t
⫹ ␤14FOREIGNi,t ⫹ ␤15PERCENTHELDi,t ⫹ ␤16BOARDINDi,t
⫹ ␤17⫺84INDUSTRYi,t ⫹ ␤85⫺86YEARi,t ⫹ ␧i,t

Note that all variable definitions are discussed below and included in the Appendix. All
variables are obtained from Compustat unless otherwise noted.

3.3 Main variables

The dependent variable CETRi,t represents a firm’s cash-effective tax rate. This rate is
measured in various ways. For the main testing of model one, CETRi,t is represented by
FIVEYEAR_CETR and is defined, similar to Dyreng et al. (2008), as the sum of cash
taxes paid over five years divided by the five-year sum of firm pretax income after
deducting special items[9]. CETRi,t is also denoted as AVG_CETR in model one, which
represents the five-year average annual CETR over the sample period. This is included
as a dependent variable in a separate long-term analysis for comparison with the
Dyreng et al. (2008) measure (FIVEYEAR_CETR) in model one. In model two, CETRi,t is
 represented by AVG_CETR which is the average of the annual CETR over a three-year Auditor-
period. provided tax
AVG_TAXFEES, our measure of long-term APTS, is measured as the average tax
fees paid scaled by selling, general and administrative expenses for each sample firm, by
services
year, then averaged over the five-year sample period[10]. Using a per cent change from
year one to year five could overly influence both these individual years, as well as fail to
account for large variations that occur during the middle sample years. Therefore, 291
average scaled tax fees, a level instead of change variable, were used to smooth out any
potential single-year variations.
Firms with lower tax fees paid to their auditors over the sample period are predicted
in H1 to have higher long-term CETRs. Following, firms that invest in APTS may be
more able to realize low CETRs over longer time horizons. A negative relation is
predicted as lower fees paid should be associated with higher taxes paid[11].
To test H2, we investigate three scenarios of changes representing year (t) decreases in
fees followed by subsequent year (t ⫹ 1) increases, between 10 and 40 per cent
(SMALLSPIKE)[12], between 41 and 70 per cent (MEDIUMSPIKE) and over 70 per cent
Review of Accounting Finance 2015.14:285-305.

(LARGESPIKE). For each per cent analysis, we add indicator variables for firms that
reduced their services in one year (t) and then increased their fees by at least that much in the
following year (t ⫹ 1)[13]. For example, a company would only be classified as a
MEDIUMSPIKE if the firm decreased APTS between 41 and 70 per cent in a single year (t)
followed in year (t ⫹ 1) with an increase in APTS resulting in the firm at least paying the
same (or greater) tax fees than they were paying prior to the decrease year (year t ⫺ 1)[14]. To
test H2, we use a fixed effects model that controls for industry (two-digit SIC code) and year.
Our dependent variable is (AVG_CETR), computed similar to our five-year average cash
taxes paid measure, beginning the year after the fee increase for three years (t ⫹ 2 to t ⫹ 4)
as an indication of the long term, non-immediate nature of tax planning[15].
Because some short-term benefit is expected with an increase in (return to) APTS
(Cook and Omer, 2013), the question becomes: Does it outweigh the longer term loss from
the previous decision to reduce APTS? We examine taxes paid in the three years
following the two-year fee decrease/increase. However, examining fee decreases, and
then subsequent increases, immediately following the implementation of SOX may be
ideal as tax fee expenditure changes are more likely to have been initiated by this new
legislation as opposed to other non-regulatory reasons (Cook and Omer, 2013). Our
sample should include firms which reduced their APTS and then, perhaps realizing the
benefits of knowledge spillover, re-engaged their audit firm for tax services.

3.4 Control variables

We include industry-specific indicator variables and a number of control variables. We
winsorize our continuous control variables at the 1st and 99th percentiles by year to
account for any potential extreme values. The natural log of total sales (LOGSALES)
and the natural log of the market value of equity (LOGMVE) are used to proxy for firm
size and complexity (Ashbaugh et al., 2003; Frankel et al., 2002; Gupta et al., 2011)[16]. A
measure of firm leverage (LEVERAGE), defined as total liabilities minus current
liabilities divided by total assets, is also included (Mills et al., 1998). Because the analysis
is long-term, the financial control variables are computed as the sum of the first year’s
end-of-year number and the last year’s end-of-year number divided by two (Dyreng
et al., 2008). For example, in the five-year analysis, LEVERAGE equals the ratio of total
 RAF liabilities minus current liabilities divided by total assets in year t plus the same ratio for
14,3 year t ⫹ 4 divided by 2[17].
We also account for the tax complexity of firms (Mills et al., 1998; Seetharaman et al.,
2011; Kinney et al., 2004). An indicator variable equal to one if the firm had a restatement
in the tax year and zero otherwise (RESTATEMENT) is included and summed as the
total number of restatement years during the five- (or three-) year period being studied.
292 CAPITAL, which is computed as the ratio of net property, plant and equipment to total
firm assets is included. When AVG_CETR is the dependent variable, CAPITAL is
calculated as the average amount of net property, plant and equipment, scaled by total
assets, over the five- (three-) year period. When FIVEYEAR_CETR is the dependent
variable, CAPITAL is calculated as the ratio of net property, plant and equipment,
scaled by total assets in the first year plus the same ratio for the fifth year divided by 2.
PRETAXROA is used to control for the progressive nature of the tax rate schedule.
The longer-term measures are also calculated according to the dependent variable as
just described for CAPITAL. FOREIGN is an indicator variable equal to one if foreign
taxes are positive (Compustat TXFO ⬎ 0) and zero otherwise, while N_SEG is a
Review of Accounting Finance 2015.14:285-305.

continuous variable equal to the number of reportable business segments. For our
long-term analysis, we use the average number of segments over the reporting period
used (N_SEG) and the sum of the number of years in which foreign operations are
reported (FOREIGN). Acquisitions are controlled for with ACQUIS, an indicator
variable equal to the sum of the number of years the firm had an acquisition in the five-
(or three) year period being studied.
PERCENTHELD, representing the percentage of shares held by institutional
investors divided by total shares outstanding is included and is predicted to be
positively related to taxes paid. BOARDIND, representing the percentage of board
members who would be considered independent and BIG4 is the sum of the number of
years in which the firm engaged a big four accounting firm (BIG4) as auditor. NOL is an
indicator variable equaling one if the firm had a net operating loss (NOL) carry-forward
and zero otherwise. For the long-term analysis, the sum of NOL years is utilized (NOL).
INDUSTRY is measured by two-digit SIC codes and is used to control for any
industry-based influences on CETRs, while YEAR represents indicator variables for
each sample year. In all analyses, these variables are consistently significant but not
presented in the tables due to space limitations.

4. Results
4.1 Descriptive statistics
Table II reports descriptive statistics for one- and five-year periods. The mean value for
CETR in the one- and five-year periods is 0.25 and 0.25, respectively. These numbers are
slightly lower than the figures reported of 27 (29) per cent for 1- (five) year CETRs reported
in the Dyreng et al. (2008) study[18]. Looking at CHANGECETR, the yearly per cent change
in CETR, highlights the importance of looking at a long-term measurement. The one-year
mean change of 1.38 clearly indicates a significant amount of variation when compared to
the median of 0.07. However, the mean (median) over five years is 0.28 (0.27).
Firm and tax complexity demographics in this study are comparable to other studies
using similar sample periods (Bédard and Paquette, 2011). Approximately 82 per cent of
firm years are audited by one of the big four accounting firms, 74 per cent of directors are
considered independent and institutional investor holdings are approximately
 One year Five years
Auditor-
Mean Median Mean Median provided tax
Variables (n ⫽ 11,409/9,169) (n ⫽ 4,173) services
Tax variables
CETR 0.25 0.24 0.25 0.26
CHANGECETR 1.38 0.07 0.28 0.27
BTD 0.03 0.02 0.02 0.02
293
PERMBTD 0.03 0.02 0.02 0.02
PRETAXINC 482.47 52.55 511.87 58.79
TAX FEES 388,663 66,000 394,887 90,771
LTAX FEES 9.47 11.09 9.58 10.88
AVG_TAXFEES 0.00175 0.0007 0.00165 0.0008
TAX RATIO 0.11 0.08 0.11 0.09
FEEPERCENTCHANGE 0.33 ⫺0.02 0.34 ⫺0.32
Firm control variables
LOGSALES 6.41 6.45 6.54 6.58
Review of Accounting Finance 2015.14:285-305.

LOGMVE 6.33 6.56 6.34 6.54

LEVERAGE 0.27 0.24 0.28 0.26
PRETAXROA 0.09 0.08 0.08 0.07
BIG4 0.82 1.00 4.25 5.00
PERCENTHELD 0.62 0.69 0.64 0.69
BOARDIND 0.74 0.77 0.74 0.76
Tax complexity variables
CAPITAL 0.22 0.14 0.23 0.17
N_SEG 2.54 1.00 2.53 1.60
NOL 0.35 0.00 1.83 0.00
ACQUIS 0.16 0.00 0.79 0.00
FOREIGN 0.51 1.00 2.73 4.00
RESTATEMENT 0.13 0.00 0.58 0.00

Notes: See Appendix for variable definitions. All continuous variables are winsorized at top and
bottom 1% of their cross-sectional distribution by year. For the one-year descriptives, “change”
variables (CHANGECETR, FEEPERCENTCHANGE) have only 9,169 observations as a change can not Table II.
be computed for the first year. This reduces the one-year sample by 2,240 firm-year observations Descriptive statistics

62 per cent. In regards to the tax complexity variables, 51 per cent of sample firm years
have foreign operations, 35 per cent of firms have net operating losses in a single firm
year, 13 per cent of firm years have a restatement and 16 per cent of firm years have a
merger or acquisition. Finally, the short-term ratio of net property, plant and equipment
to total assets (CAPITAL) is 0.22. This is much smaller than the 0.46 mean found by
Mills et al. (1998). However, a direct comparison is hard to make, as the sample used in
that study is from the early 1990s, while our sample utilizes firm data from 2003-2009.
Overall, these complexity measures are largely consistent between the one- and
five-year observations.
H2 studies firms that have reduced their APTS and then increased them the
following year. Table III provides descriptive statistics on the firms that show this type
of fluctuation in their utilization of APTS. The SPIKE firms are companies who
 Review of Accounting Finance 2015.14:285-305.

firms
14,3

294
RAF

Table III.
Descriptive
statistics–SPIKE
NON-SPIKE
SAMPLE SMALLSPIKE MEDIUMSPIKE LARGESPIKE
Mean Median Mean Median Mean Median Mean Median
Variables (n ⫽ 1,713) (n ⫽ 267) (n ⫽ 125) (n ⫽ 182)

Tax variables
CETR 0.262 0.261 0.284** 0.299*** 0.282* 0.283* 0.242** 0.244
TAX FEES 360,507 75,030 392,518 156,857*** 288,409 147,467*** 171,698*** 58,360
Firm control variables
LOGSALES 7.04 7.03 6.45*** 6.52*** 6.83 6.95 6.95 6.89
LOGMVE 6.79 6.89 6.14*** 6.43*** 6.56 6.79 6.61 6.75
PRETAXINC 630.96 64.01 294.90** 28.22*** 181.98** 60.75 454.01 51.84
LEVERAGE 0.28 0.27 0.27 0.25 0.30 0.28 0.29 0.24
PRETAXROA 0.21 0.22 0.19 0.18 0.20 0.20 0.16** 0.17**
BIG4 2.67 3.00 2.50*** 3.00 2.71 3.00 2.70 3.00
PERCENTHELD 0.70 0.77 0.64*** 0.70*** 0.74 0.76 0.73 0.76
BOARDIND 0.76 0.78 0.74* 0.75** 0.77 0.80 0.76 0.76
Tax complexity variables
CAPITAL 0.23 0.15 0.22 0.15 0.23 0.15 0.24 0.16
N_SEG 2.87 2.00 2.84 1.67 3.20 1.67 3.06 1.83
NOL 1.26 0.00 1.12 0.00 1.20 0.00 1.34 1.00
ACQUIS 0.53 0.00 0.46 0.00 0.54 0.00 0.51 0.00
FOREIGN 1.88 3.00 1.73 3.00 1.76 3.00 1.58*** 2.00***
RESTATEMENT 0.33 0.00 0.32 0.00 0.34 0.00 0.43** 0.00

Notes: * , ** and *** denote two-tailed statistical significance at 10, 5 and 1%, respectively; see Appendix for variable definitions. SPIKE is an indicator
variable equal to 1 if the firm experienced a reduction in tax fees of 10-40% (SMALLSPIKE), 41-70% (MEDIUMSPIKE) or greater than 70% (LARGESPIKE)
followed by an increase that exceeded the prior year percent decrease for various analysis. In addition, SPIKE ⫽ 1 only if the increase year returned the firm
to at least the tax fee amounts paid prior to the decrease year. CETR equals the average CETR over the three-year sample period following the SPIKE year.
The non-SPIKE sample represents the firms that did not have SPIKE ⫽ 1 for any of the SPIKE calculations and includes all firms with decreases in APTS
in year one of at least 10%. The SPIKE sample represents all SPIKE firms that meet the criteria for each SPIKE category. In other words, the
MEDIUMSPIKE group equals only SPIKE firms that returned to at least their initial pre-decrease level in the year immediately following a decrease in fees
of between 41-70%. All mean/median tests are between each individual SPIKE category and the sample of Non-SPIKE firms
 increased their APTS in the year immediately following a decrease year[19]. To see if Auditor-
these firms differ from other firms that decreased APTS over the same period, we isolate provided tax
these firms as the control sample. The firms are segregated by the amount of fluctuation
they have in APTS.
services
As can be seen in Table III, for the most part, there are few significant differences
between the SPIKE and non-SPIKE firms. Consistent with our expectations, CETRs of
SPIKE firms show a significant decreasing pattern as the level of subsequent year fee 295
increase rises. Firms in the SMALLSPIKE category exhibit significantly higher CETRs
(0.284) over the non-SPIKE sample in the three years following their return to APTS
while the LARGESPIKE firms have the lowest CETR (0.242). Examining the
SMALLSPIKE group, it is interesting to note that these firms pay the highest APTS on
average (not significantly different from non-SPIKE sample) while reporting the highest
mean CETR. Additionally, they are significantly smaller than the non-SPIKE group in
terms of sales (LOGSALES) and are less likely to choose a Big4 provider. However, none
of the tax complexity variables is significantly different than the non-SPIKE sample.
Further, pre-tax income appears lower, on average, for the two smaller SPIKE groups.
Review of Accounting Finance 2015.14:285-305.

4.2 Results of hypothesis tests

H1 examines the relation between long-term taxes and fees paid to auditing firms for tax
services. Results supporting H1 are reported in Table IV. As previously defined, two
different five-year measures are used (FIVEYEAR_CETR and AVG_CETR).
FIVEYEAR_CETR is used to minimize the potential effects of single-year extreme
values (Dyreng et al., 2008), while AVG_CETR provides supplemental support. In this
regard, AVG_CETR will confirm whether single-year variations overly influence total
long-term cash taxes paid.
The first column of Table IV shows results for FIVEYEAR_CETR. We find the
expected strong negative relationship between APTS and CETRs to be significant at 1
per cent. Having lower APTS is associated with an increased tax burden as measured by
long-term CETR. The coefficient on AVG_TAXFEES is ⫺2.68. Using the five-year
average of our sample (AVG_TAXFEES ⫽ 0.00165) will result, on average, in a 0.4422
per cent lower CETR. When applied to the sample average pretax book income of
$511.87 million, the tax savings result is almost $2.26 million per year with the five-year
savings of $11.30 million[20]. This long-term investment in tax planning, particularly
with APTS, is significantly associated with fewer taxes paid[21].
Our supplemental long-term measure, AVG_CETR, also shows a significant and
expected negative relationship in Table IV. When extrapolating to the sample, these
findings produce an average tax savings over five years of $5.95 million. It is important
to note that, although this alternative test does provide robustness for our results, it is
possible that these results are biased by extreme one-year variations in the annual
measures of CETR (Dyreng et al., 2008). Overall, the analysis shows that APTS are
negatively correlated with cash taxes paid over the long run.
H2 examines firms that increase their APTS after having reduced those services. If
firms potentially pay higher taxes following reductions in APTS, then H2 analyzes
whether firms that reengage their auditors for tax services regain any benefits in the
following years. The results of H2 are provided in Table V and show some interesting
findings. The variable of interest, the different levels of spike, has a positive and
significant coefficient in the SMALLSPIKE analysis, positive and marginally
 RAF Independent variablesa Prediction FIVEYEAR_CETR AVG_CETR
14,3
AVG_TAXFEES ⫺ ⫺2.68*** ⫺1.41**
RESTATEMENT ? 0.02 0.04**
CAPITAL ⫺ ⫺0.01 0.09
LOGSALES ? 0.03 0.03
296 LOGMVE ? ⫺0.06*** ⫺0.03
N_SEG ? 0.00 0.01*
BIG4 ? 0.02 0.05***
PERCENTHELD ⫹ ⫺0.04 0.02*
BOARDIND ? ⫺0.77*** ⫺0.39***
NOL ⫺ ⫺0.07*** ⫺0.06***
LEVERAGE ⫺ ⫺0.66*** ⫺0.40***
PRETAXROA ? 0.24 0.22***
ACQUIS ? ⫺0.02 ⫺0.02
FOREIGN ? 0.04*** 0.05***
Adjusted R2 0.77 0.84
F-statistic 295.40 395.89
Review of Accounting Finance 2015.14:285-305.

Pr ⬎ F ⬍0.0001 ⬍0.0001
N 4,173 4,173

Notes: * , ** and *** denote statistical significance at 10, 5 and 1%, respectively; a industry-level
fixed effects based on two-digit SIC code industry classifications are included in the regression analysis
(omitted to conserve space). t-statistics using Huber–White corrections (Gleason and Mills, 2011) and
clustered by firm are included below coefficient estimates. Regression analysis of measures of long-term
measures of tax avoidance on tax services. AVG_TAXFEES represent tax fees paid to the auditing firm
Table IV. (APTS), scaled by selling, general and administrative costs (data XSGA), averaged over the years being
Long-term regression studied. The AVG_CETR variable is computed by summing the individual CETR measures and then
analysis of tax dividing them by the number of sample periods. FIVEYEAR_CETR is computed similar to Dyreng et al.
avoidance on tax (2008) (⌺ cash taxes paid/⌺ pretax income ⫺ ⌺ special items) over the five-year sample period. For a
services complete description of all variables, see the Appendix

significant in the MEDIUMSPIKE and negative and significant in the LARGESPIKE

analysis. The positive coefficient on SMALLSPIKE indicates that for the three years
following the return to previous levels of APTS (t ⫹ 2 to t ⫹ 4), SMALLSPIKE firms
have higher CETRs than the sample of firms (non-SPIKEs) that decreased fees in year
one (t) and did not reengage their auditor to at least their pre-decrease level over the
remaining sample period (t ⫹ 1 to t ⫹ 4)[22]. Results for the SMALLSPIKE firms exhibit
a 2.0 per cent increase in three-year average CETR as compared to the other firms. The
2.0 per cent increase in CETR is quite significant when analyzed with firm pretax
income. The demographics for the SPIKE sample (Table III) shows pretax income for the
SMALLSPIKE firms to be $294.90 million which results in an increased tax cost on
average of approximately $5.9 million per year and almost $18 million for three years
over firms that do not reengage their auditors after a similar decrease. Although
marginally significant, firms in the MEDIUMSPIKE also continue to exhibit higher
taxes paid when compared to the control sample of firms. However, when looking at the
LARGESPIKE firms, results confirm that large increases in APTS, after prior year
similar decreases yield renewed benefits upon return. These greater than 70 per cent
SPIKE firms reduce their CETR by an additional 1.9 per cent when compared to the
 Independent variablesa Coefficient
Auditor-
provided tax
INTERCEPT 0.297*** services
SMALLSPIKE 0.020**
MEDIUMSPIKE 0.021*
LARGESPIKE ⫺0.019**
PRETAXROA 0.067***
RESTATEMENT 0.012***
297
CAPITAL ⫺0.058***
LOGSALES 0.010***
LOGMVE ⫺0.002
N_SEG ⫺0.002
BIG4 0.006
PERCENTHELD ⫺0.015
BOARDIND ⫺0.025
NOL ⫺0.011***
LEVERAGE ⫺0.064***
ACQUIS ⫺0.003
Review of Accounting Finance 2015.14:285-305.

FOREIGN ⫺0.010***
Adjusted R2 0.08
F-statistic 11.00
Pr ⬎ F ⬍0.0001
N 2,287

Notes: Coefficient results are included, while *** , ** and * indicate two-tailed statistical Table V.
significance at 1, 5 and 10% levels; a industry variables omitted to conserve space; see the Appendix for Regression analysis
all variable definitions. Results above are for regression analysis with three-year average CETR of returning to
(AVG_CETR) as the dependent variable and indicator variables representing increases in tax fees paid auditor provided tax
in the year immediately following a decrease in fees paid to the auditing firm of at least 10-40, 41-70 and services on long-term
greater than 70%. Firms are not included as SPIKE firms if increase year fees do not exceed the fees paid taxes paid dependent
in the year prior to the decrease year. In this regard, firms are SPIKE firms if they return to pre-decrease variable ⫽
levels AVG_CETR

subsample of firms that decreased APTS. The average tax savings for the sample would
be $8.63 million per year or $25.9 million over three years.
Examining the different results between the SMALLSPIKE and LARGESPIKE
firms, it is important to note that, overall, when considering the coefficient on
LARGESPIKE and the intercept, that the firm is still experiencing an increase in CETR.
However, it is just a smaller increase than those firms which had a SMALLSPIKE or did
not have any subsequent increase after their decrease. Overall, there is still a
significantly smaller increase in CETR for the LARGESPIKE firms. With the
SMALLSPIKE firms, it may be a simple matter of the increases being compliance
oriented or less aggressive or small planning initiatives[23]. On the other hand, the
LARGESPIKE firms may be buying back that synergy with more services.
Our results provide support to the theory that the potential beneficial effects from
knowledge spillover are mitigated upon reductions in APTS, at least to some extent.
This may be surprising given that the reduction was only for one year. Although firm
knowledge might have been lost, another potential explanation might be that firms, still
concerned about independence perceptions, reengaged their auditors but only a small
 RAF group were willing to sign off on more aggressive tax planning strategies that would
14,3 result in immediate tax benefits. These firms may have overreacted (large decreases)
over fears of independence concerns but were quick to reestablish their previous fee
levels after this initial year passed. Overall, only firms that reengage their auditor for tax
services at the highest level (greater than 70 per cent) obtain lower CETRs in the
immediate years following their return. In this case, some of the knowledge spillover is
298 regained at a price.

5. Summary and conclusions

This study examines the impact of tax fees paid to auditors on cash taxes paid. Results
show that, over the long term, lower levels of fees paid to auditing firms are associated
with higher taxes. Therefore, the long-term effects, as opposed to only short-term,
should play a significant role in the cost-benefit analysis of the decision to utilize APTS.
Replacing APTS with the services of another firm should still produce tax savings.
However, if knowledge spillover does exist (Larcker and Richardson, 2004; Seetharaman
et al., 2011), then synergies gained from combining the audit and tax function within one
Review of Accounting Finance 2015.14:285-305.

accounting firm might be lost. Although causality is inconclusive, our results appear to
support the theory of knowledge spillover.
H2 further explores the relationship between CETRs and APTS by studying those
firms that return to APTS after a prior year fee reduction. Our results indicate that,
although some value is gained by returning to APTS, there appears to be a detrimental
effect to the firm’s long-term tax burden that corresponds to the amount of tax services
dropped and then repurchased at a later date, unless that repurchase is over 70 per cent.
When combined with the results in H1, it seems likely that the disruption in APTS
damaged the efficiencies and synergies created through a combined audit–tax
engagement. It is possible, even likely, that benefits would return in the coming years.
This study contributes to the extant literature in several ways. The results contribute
to the policy discussion on auditor independence. The tax savings benefit associated
with APTS is likely to be a cost if further restrictions on non-audit services to audit
clients are implemented. Additionally, we contribute to the growing literature on the
tradeoff between independence and knowledge spillover. We are the first, to our
knowledge, to look at the long-term benefits of APTS as they relate to tax savings.
Further, we also are the first study to look at firms that return to APTS after a reduction.
We find that even a short break from APTS can lead to a higher tax burden for most
firms, unless the increase back to APTS is greater than 70 per cent.
There are limitations in this study. As pointed out by Maydew and Shackelford
(2007), tax fees paid to non-audit firms are not publicly available. While this study does
provide evidence that APTS have value, firms that are engaging their auditor for tax
services may also be paying outside firms for tax planning. Increasing APTS may be
accompanied by increasing fees to outside firms and vice versa. As this additional
variable is unknown, the effects accrued from each category are unknown. Further, the
amount of tax fees reported are not segregated between compliance fees and planning
fees. Presumably, compliance fees will be relatively stable from year to year, and most
changes will be reflective of changes in planning fees. Although this is a reasonable
assumption, there is no way to verify this.
Additionally, as the sample solely includes companies that paid their auditors for tax
services during any period in 2003-2009, the possibility exists that some companies only
 paid fees to non-audit firms, or did not pay fees to either type of accounting firm and Auditor-
solely relied on internal tax services. If this is the case, the restrictive sample limits the provided tax
generalizability of any conclusions. Further, the time frame includes the implementation
of FIN 48 in 2006. It is possible that this implementation has changed firms’ level of tax
services
services in general or those contracted with their auditor. Lastly, as mentioned by
Whisenant et al. (2003), the pricing of audit and tax fees are jointly determined.
Additionally, the choice to buy APTS is perhaps endogenous. Firms that choose to buy 299
APTS presumably have tax planning opportunities available resulting in reduced
CETRs. Firms with fewer opportunities choose not to buy APTS and have higher
CETRs. Future research should study the complex endogeneity of this relationship.
There are also opportunities for additional research. Dyreng et al. (2008) look at a
10-year time horizon for tax planning implications. Researchers can look at a longer
horizon relationship between APTS and CETRs. Additional research can also examine
the sample of firms who return to their auditors after reducing services. As our results
provide support for the detrimental impact of APTS reductions in certain groups,
research can further examine potential motivations of these firms.
Review of Accounting Finance 2015.14:285-305.

Notes
1. Although we do not make any commentaries on whether reduced taxes are good or bad,
presumably firms and shareholders would prefer to pay less taxes while policymakers would
prefer firms that are less tax aggressive.
2. It is important to note that these studies predominantly look at all non-audit services provided
by the auditor and not just APTS. In general, APTS may be viewed by some as less of a threat
to independence than other services.
3. The definition of long-term is largely subjective though studies often use five- or ten-year
horizons (Dyreng et al., 2008).
4. An unnecessary tax does not imply tax savings from illicit or illegal activities (activities that
may result in IRS audit adjustments and/or financial statement restatements). These taxes are
merely those that can be eliminated or delayed through legal tax planning opportunities.
5. The Omer et al. (2006) study uses marginal tax rates (MTRs) and effective tax rates (ETRs) as
their tax variables. While their ETR measure is similar to the CETR measure used in our
study, we also examine the long-term impact of tax fees on tax rates, as opposed to the one
year (2002) used in their study.
6. It is important to note that Fin 48 became effective for sample firms in 2006. It is unclear as to
how this implementation will effect firm tax planning.
7. Results for all five-year analysis tests were qualitatively similar when analyzed with only the
2003-2007 sample firms (the time period immediately following SOX).
8. We use a VIF statistic to check for multicollinearity. All test results were well below the
threshold for concerns of multicollinearity.
9. As documented by Dyreng et al. (2008), the cash-based taxes paid (CETR) is limited because
the denominator (pretax income minus special items) may be affected by activities designed
to manage pretax income that have no effect on cash taxes paid, such as accruals
management. Those authors note that a long-term analysis of cash taxes paid should be less
affected by this limitation as the long-term measure should capture the reversal of these
accruals.
 RAF 10. We scale our measure of long-term APTS by selling, general and administrative expenses
14,3 similar to prior literature (Mills et al., 1998; Gleason and Mills, 2011) to ensure that
high-volume and low-margin firms do not unnecessarily skew the ratio.
11. One other independent variable that has been used is the ratio of non-audit fees to total fees
(Bedard et al., 2010) or tax to audit fees. We did not use this measure of auditor independence
because firm ratios have also changed due to increased audit fees for compliance post-SOX.
300 As we are more concerned about the impact of changes in tax fees on taxes paid, as opposed
to the change in the overall fee structure, we did not separately test this measure.
12. Any changes less than 10 per cent are likely to be due to year-to-year variations in compliance
fees paid and not necessarily due to management decisions about changing service providers
for tax consulting. We chose our percent breakdown of APTS to approximate the nearest 10
per cent for a split of our firms into three groups. Further, we wanted to ensure a sufficient
sample size for each group.
13. Firms in the larger SPIKE categories are not classified as SPIKE firms in lower percent
groups. In other words, firms are classified in groups based upon their initial percent decrease
Review of Accounting Finance 2015.14:285-305.

(10-40, 41-70, greater than 70 per cent) as well as their subsequent return (SPIKE) to
pre-decrease fee levels.
14. For example, a decrease of 30 per cent (t), followed by an increase of 30 per cent (t ⫹ 1) would
result in the firm paying less fees as the year prior to the decrease (t ⫺ 1). Further, we only
included firms as SPIKEs that had an increase in the year following a decrease rather than any
subsequent year following a decrease due to constraints of the time horizon.
15. We also ran our SPIKE analysis with THREEYEAR_CETR, computed similar to our
FIVEYEAR_CETR variable as the main DV and results were qualitatively similar. Further,
we also examined CETRs in the year of the increase (short-term analysis) to test whether firms
that reengage their auditors immediately pay lower cash taxes. This short-term SPIKE
analysis showed that our two smallest SPIKE categories (SMALLSPIKE and
MEDIUMSPIKE) had significantly higher CETRs in the SPIKE year (p ⬍ 0.05), while the
largest SPIKE category (LARGESPIKE) was positive and insignificant. This indicates that
any benefits lost due to the break in services may be immediately felt for these specific
categories. In addition, as our long-term analysis is negative and significant (p ⬍ 0.05), while
the short-term results were positive and insignificant for the largest SPIKE group
(LARGESPIKE), implies that any benefits received for returning may not be immediate.
16. In supplemental analysis (untabulated), the natural log of total assets (LOGTA) was also used
as a control variable for firm size. Results were not significantly different.
17. When FIVEYEAR_CETR is the main DV, long-term continuous control variables are
computed similar to Dyreng et al. (2008). For example, LEVERAGE is the ratio of total
liabilities minus current liabilities divided by total assets in year t plus the same ratio for year
t ⫹ 4 divided by 2. When AVG_CETR is the main DV, average values of continuous variables
are used over the five-year sample period. Long-term indicator variables (“SUM”) are
computed in the same manner for both DV variable studies and are equal to the sum of all
indicator years.
18. The Dyreng et al. (2008) paper used 1995-2004 data, while our sample comprised firm years
2003-2009. One potential explanation is the Dyreng et al. (2008) sample includes all firms with
available taxes paid data as opposed to firms that also have fees paid to their auditors.
 19. Our SPIKE sample does not appear to be driven by any particular external tax event that Auditor-
occurred over the sample period. Therefore, SPIKEs in a particular tax year, for example,
provided tax
caused by increased APTS due to the Dividend Tax Repatriation Holiday in 2004 do not
appear to be driving our results. services
20. For purposes of estimate, we use pretax book income, as actual taxable income is not known.
21. Firms that are either increasing or decreasing APTS may have different motivations for
making that decision. Treating them as a homogenous group may obscure information 301
regarding changes in APTS and the association with CETRs. In untabulated results, we
divided our sample based upon firms that increased or decreased fees over the five-year
sample period. Relationships between APTS and CETRs in these tests were similar and in the
predicted directions to the full sample results.
22. A five-year window is used for our SPIKE analysis. Year t represents the year of decrease for
both our SPIKE sample as well as our NON-SPIKE group. In the second year (t ⫹ 1), the
SPIKE sample reengages their auditor to at least the same fee level as was paid prior to the
year t decrease. The NON-SPIKE sample does not return to this pre-decrease level. We then
measure CETRs over the following three years (t ⫹ 2 to t ⫹ 4) for these two groups and ensure
Review of Accounting Finance 2015.14:285-305.

that the non-SPIKE firms in our sample never return in these years to their pre decrease levels
of APTS.
23. One additional explanation might be that non-SPIKE firms, after reducing APTS, might have
chosen to engage other firms for their tax services. As fees paid to non-audit firms are
unknown, we could not directly test these fees versus firms that return to their auditors in
whatever increment.

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 RAF Appendix
14,3

Variable Description

ACQUIS 1 if the firm had a merger/acquisition in the current year (variable Sale_FN ⫽
304 “AA” or “AB”) 0 otherwise and summed over the time period indicated
BIG4 1 If auditor_fkey ⫽ 1, 2, 3 or 4 (Audit Analytics); 0 otherwise; long-term
analysis is the sum of the variable over the time period indicated
BOARDIND From BoardEX database, represents the percentage of the total members of
the firm’s board of directors who would be considered independent
CAPITAL Net property, plant and equipment (data PPENT) scaled by total assets (data
AT); long-term analysis uses the average over the time period indicated when
AVG_CETR is the dependent variable or equal to first-year calculation plus
last-year calculation divided by two when FIVEYEAR_CETR is the
dependent variable
CETR/AVG_CETR CETR equals cash taxes paid (data TXPD) divided by (pretax income (data
PI) – special items (data SPI)), AVG_CETR equals the average of each annual
Review of Accounting Finance 2015.14:285-305.

CETR over the time period indicated

CHANGECETR/ Percent change in CETR from year t ⫺ 1 to t. For long-term analysis,
FIVEYEAR_CETR FIVEYEAR_CETR is computed similar to Dyreng et al. (2008) (⌺cash taxes
paid/⌺pretax income – ⌺ special items)
FEEPERCENTCHANGE Percentage of current tax fees ⫺ prior year tax fees divided by prior year tax
fees. Tax fees are scaled by SG&A expenses (data XSGA). For the long-term
analysis, unlike the short-term in which changes are computed from years
t ⫺ 1 to t (for example, 2004 is computed as the change from 2003 to 2004),
scaled changes are computed from the first reported observation (year t) to
the fifth year observation (year t ⫹ 4). For example, changes from the 2003
(t) ⫺ 2007 (t ⫹ 4) tax years is used to compute this five-year scaled change
FOREIGN 1 if foreign taxes paid; 0 otherwise (data TXFO)
LEVERAGE Liabilities total (Compustat LT) minus current liabilities (data LCT) scaled by
total assets (data AT) averaged over the time period indicated when
AVG_CETR is the dependent variable or equal to first-year calculation plus
last-year calculation divided by two when FIVEYEAR_CETR is the
dependent variable
LOGMVE Natural log of market value at the fiscal year end (data MKVALT) averaged
over the time period indicated when AVG_CETR is the dependent variable or
equal to first-year calculation plus last-year calculation divided by two when
FIVEYEAR_CETR is the dependent variable
LOGSALES Natural log of total revenue (data REVT) averaged over the time period
indicated when AVG_CETR is the dependent variable or equal to first-year
calculation plus last-year calculation divided by two when
FIVEYEAR_CETR is the dependent variable
LTAXFEES Natural log of tax fees paid to the auditing firm (APTS) from Audit Analytics
N_SEG Number of business segments averaged over the time period indicated
NOL 1 if tax loss carryforward ⬎0 (data TLCF) and 0 otherwise summed over the
time period indicated
PERCENTHELD From Thomson Reuters Institutional Holdings (13F) database, represents the
percentage of shares held by institutional investors divided by total
outstanding shares
PRETAXINC Pretax Income (data PI) in millions averaged over the time period indicated
Table AI. (continued)
 Variable Description
Auditor-
provided tax
PRETAXROA Pretax Income (data PI) ⫺ special items (data SPI)/total assets (data AT)
averaged over the time period indicated when AVG_CETR is the dependent
services
variable or equal to first-year calculation plus last-year calculation divided by
two when FIVEYEAR_CETR is the dependent variable
RESTATEMENT 1 if the firm announced a restatement in the current year and 0 otherwise
summed over the time period indicated 305
SPIKE Indicator variable if the firm experienced a reduction in tax fees of between
10-40%, 41-70% or greater than 70% followed in the next tax year by an
increase for various analyses; SPIKE ⫽ 1 only if increase year returns firm to
at least amount of fees paid in the pre-decrease year, 0 otherwise.
TAX Tax fees paid to the auditing firm (APTS) from Audit Analytics.
FEES/AVG_TAXFEES AVG_TAXFEES is the TAX FEES measure, scaled by selling, general and
administrative costs (data XSGA), averaged over the years being studied (3
or 5 years)
TAX RATIO Ratio of tax fees paid to auditing firm to total fees reported paid to auditing
firm
Review of Accounting Finance 2015.14:285-305.

Note: All data are from Compustat unless otherwise indicated Table AI.

About the authors

Brian Hogan is a Clinical Assistant Professor of business administration at the University of
Pittsburgh. His research focuses on the effects of corporate disclosures on internal and external
parties as well as studying the implications of changes in corporate and individual tax policies. He
has published papers in The Journal of the American Taxation Association, The Journal of
Accounting and Finance and Global Perspectives in Accounting Education. Brian Hogan is the
corresponding author and can be contacted at: bhogan@katz.pitt.edu
Tracy Noga is an Associate Professor of accountancy at Bentley University with a specialty in
researching and teaching taxation. She earned her PhD at Texas Tech University. She is currently
interested in corporate book-tax differences, auditor-provided tax services and corporate
lobbying. She has published in Journal of Corporate Finance and Accounting Horizons.

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